As Soludo Moves to Shake out Banking Industry...
Bank Capital Now N25bn
Over 69 banks may go by 2005 Bank directors begin merger talks
By Ayodele Aminu in Lagos and Kunle Aderinokun in Abuja
The Central Bank of Nigeria (CBN) has raised the minimum paid up capital of banks to N25 billion in a move aimed at strengthening the industry. They are expected to fully comply by December 31, 2005.
This directive which was handed over to the banks yesterday at the 273rd edition of the Bankers' Committee meeting in Abuja may see over 69 banks out of the 89 currently operating in the country go. Already directors of some of the banks that are likely to be affected have begun merger talks.
Governor of CBN, Professor Charles Soludo, who annou-nced these new policy measures said "only the banks that meet the requirement can hold public sector deposits and participate in the Dutch Auction System (DAS) by end 2005."
According to him, the banks have a grace period of 18 months to meet the target "rather than 12 months normally given in many countries."
With this development, the CBN has pushed up banks' capital requirement by 1150 per cent from its present N2 billion.
However, there were mixed reactions to the new policy direction by bank CEOs that spoke to THISDAY last night. While some welcomed the directive, others said the time frame for compliance was rather short.
Also, the CBN said it would embark on phased withdrawal of public sector funds from banks starting this month just as it vowed to adopt zero tolerance in banks' rendition/reporting of their returns.
The Special Meeting of the Bankers' Committee, the first to be held in Abuja, had in attendance Chairmen and Managing Directors/Chief Executive Officers (CEOs) of the nation's 89 banks.
Soludo who spoke on "Consolidating the Nigerian Banking Industry to Meet the Development Challenges of the 21st Century" said the upward review of the capital base forms part of the major elements of the reforms by the CBN in the first phase of the banking sector reforms.
He added that the CBN would publish the names of banks that qualify by December 31, 2005 while those that merge and meet the minimum capital base by March 2005 would be rewarded.
Soludo disclosed that CBN will collaborate with other institutions like the Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), the Nigeria Stock Exchange (NSE), the fiscal authorities, National Assembly and the Bankers' Committee to work out the structure of incentives and legal/regulatory frameworks to facilitate the rapid consolidation of the system.
According to him, "we would set up technical committee, including international and national consultants to provide free consultancy services to banks intending to merge or that are involved in acquisitions. The gamut of incentives and guidelines would be out within one month. We welcome suggestions on the way forward. Banks that merge and meet the minimum capital base by March 2005 will be rewarded."
Soludo had on assumption of duty on June 1, 2004 asked banks to seriously consider mergers and acquisition for growth and development of the banking sector and the economy.
The decision by the CBN to increase the minimum capital requirement from N2 billion to N25 billion was driven by its desire to encourage mergers and acquisition with a view to strengthening and consolidating the banking industry.
Soludo harped on the need to take seriously, mergers and acquisition as an instrument for enhancing banking efficiency, size, and developmental roles.
According to him, "all over the world and given the internationalization of finance, size has become an important ingredient for success in the globalising world. In the world of finance, no country can afford to operate in isolation. The last few years have witnessed the creation of the world's banking group through mergers and acquisitions. The trend has been influenced by factors such as prospects of cost-savings due to economies of scale as well as more efficient allocation of resources; enhanced efficiency in resource allocation; and risk reduction arising from improved management."
He further explained that mergers and acquisitions especially in the banking industry is now a global phenomenon. "In the United States of America, there had been over 7000 cases of bank mergers since 1980, while the same trend occurred in the United Kingdom and other European countries.
"Specifically, in the period 1997-1998, 2003 bank mergers and acquisitions took place in the Euro area. Cross-country mergers are also taking hold. In 1998, a merger of two banks in Germany in the same year created the second largest bank in Germany with a capital base of $541 billion.
"In many emerging markets, including Argentina, Brazil, and Korea, consolidation has also become prominent, as banks strive to become more competitive and resilient to shocks as well as reposition their operations to cope with the challenges of the increasingly globalized banking systems."
In Korea, for example, Soludo noted that "the system was left with only commercial banks with about 4,500 branches after consolidation."
Soludo said "as I stand before you today, I can visualize the Nigerian and world economy in the year 2025 and 2050. What I see is a world economy with no more than 10-20 mega banks all over the world. I see national and cross-national mergers and acquisitions taking place in massive scales.
"It will not be a world for marginal or fringe players. Countries that fail to proactively position themselves today will wake up then to continue to complain of marginalisation. I can see Asia consolidating. I see consolidation in Europe, America and South America. "Consolidation is taking place in South Africa such that one bank in South Africa- Amalgamated Banks of South Africa (ABSA) has asset larger than all of Nigerian commercial banks put together. Malaysia has recently gone through its first round of consolidation whereby about 80 banks shrunk to about 12 within one year.
"In Malaysia, banks were required to raise their capital base from about $70 million to $526 million in one year. In Singapore (with about three million people), banks have now consolidated to about six and further moving down to three with the second largest bank having capital base of about $67 billion."
He, however, noted that "in Nigeria, we have 89 banks with many banks having capital base of less than $10 million and about 3300 branches. Compare this to eight banks in South Korea with about 4500 branches or the one bank in South Africa with larger assets than all our 89 banks."
He maintained that Nigerian banking system remains very marginal relative to its potential and in comparison to other countries -even in Africa.
"We have a duty to be proactive and to strategically position Nigerian banks to be active players and not spectators in the emerging world. The inability of the Nigerian banking system to voluntarily embark on consolidation in line with the global trend has necessitated the need to consider the adoption of appropriate legal and supervisory frameworks as well as comprehensive incentive package to facilitate mergers and acquisition in the industry as well as crisis resolution option and to promote the soundness, stability and enhanced efficiency of the system, " he added.
Given this scenario, Soludo said the CBN has adopted zero tolerance in the regulatory framework, especially in the area of data/information rendition/reporting. Henceforth, he said, "All returns by banks must now be signed by the MDs of the banks. The so called re-engineering or manipulation of accounts especially in hiding of information under other assets/liabilities and off-balance sheets will henceforth attract serious sanctions."
He also said the bank would not tolerate 'political solution' to any problem in the banking industry and the economy as a whole noting that the CBN would adopt "a risk focused and rule based regulatory framework."
According to him, "we will always pre-announce the rules of the games and stick to them. Arbitrariness will be reduced to the barest minimum. More often, operators who run foul of the rules plead for political solution to otherwise strict economic and financial problems should understand the damages that such arbitrariness can do to the system and the wrong signals and moral hazard that it creates.
"Once we start with one political solution, there is no end to it and the system would suffer. In the interest of preserving the integrity of the system, transparency and probity, we will insist on the rules and regulatory framework in the interest of Nigeria and Nigerians"
Briefing finance correspondents after the meeting, Director, Banking Supervision Department, CBN, Mr. Ignatius Imala said the CBN would no longer tolerate a single individual borrowing from any bank more than 10 per cent of its shareholders' fund, adding that the aggregate level of borrowing by customers has been pegged at a total of 800 per cent of the shareholders' fund.
Also, he noted that no insider or owner of a bank would be allowed to borrow more than 10 per cent of a bank's share capital. The CBN, he said, would however allow an aggregate borrowing of not more than 60 per cent of the bank's share capital.
Imala who was flanked by the Managing Directors of First Bank of Nigeria Plc and Zenith Bank Limited, Mr. Jacob Ajekigbe and Mr. Jim Ovia respectively and the CBN's spokesman, Mr. Tony Ede, said the apex bank decided to do that to protect the banks from abuse.
Ajekigbe said the decision of the CBN to increase the capital and encourage mergers and acquisitions by banks was taken in the interest of Nigerians. He said, "If you have bigger banks, you can do bigger business. At the end of the day, it's the Nigerians, the customers that would benefit."
He said banks would have bigger capital to finance the real sector. He also said given the period of 18 months to comply with the directive, it's an issue that can be tackled by banks.
Ovia said what really mattered most is that the banks and the banking system would be strengthened, noting that "the bigger the banks, the better."
He pointed out that "Nigeria is the only country in the world that has not consolidated. Nigerian banks are too small when compared to other banks in the emerging markets."
Also, reacting, Managing Director, Investment Banking and Trust Company Limited, Mr. Atedo Peterside, said, "Soludo has good intentions" but added, "Nigerian financial system is developed but fragile. His ideas, if not expertly implemented, can destroy one of the most buoyant segments of economy."
The Managing Director of Standard Trust Bank Plc, Mr. Tony Elumelu, said " I think it is a painful but very positive development for the banking industry and the economy. We should all support this bold reform by the new CBN Governor."
His counterpart at Continental Trust Bank, Mr. Adim Jibunoh, said that the development is "good for the market. It is high time the industry consolidated rather than were fragmented parts. Distress syndrome would hopefully be obliterated and customers' confidence restored. It would give the remaining banks muscle for mega transactions".
Mr. Alex Okoh of New Nigeria Bank Plc also supported the new policy reform, saying that "developments in the system make consolidation a reality." According to him, " there are too much fragmentation of small and medium size banks, hence consolidation is the best option."
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